Net worth: How can we use it?

One things I really like about knowing your net worth is how clear it makes the current state of your finances and how many different ways you can improve it.  It is essentially a live autopsy of your financial health, and with the information on hand you can determine where to make changes in your life.

Just like any good football team, it is essential to have a strong offense and defense.  Being too strong in one aspect over the other usually will not produce good results.  You can look at the value of your assets as your offense and the value of your liabilities as your defense.  If you have a healthy amount of assets but some high interest credit card and student loan debt keeping the amount of your liabilities high, that is a less stable position to be in than having a little less in assets but cutting out the credit card debt.  By looking at your net worth, you can see how a combination of making a little more money to increase your assets and getting rid of a little more debt to decrease your liability can make a big difference in the long run.

When some people find the value of their net worth, based on a number of psychological biases and assumptions, they try to decide of their net worth value is “good or bad”.  As I mentioned in my last post, the absolute value of your initial net worth is not important.  In fact, that number doesn’t mean too much because a couple who is just out of school will most likely have a high negative net worth while a child with five bucks in his pocket has a positive net worth.  Obviously the highly educated couple is in a better position to increase their net worth for the long term than the child currently is.  What is important is to keep your net worth going up consistently.

As a final point, most people who graduate any type of professional school, myself included, will most likely have a large negative net worth.  The combination of high student loan balances and being in the early stage of your earning career will likely push some net worth’s into the negative six digits.  While this may be discouraging to see, it is important to know that by paying off high interest student loans first and starting to make some real money, that net worth value will start to grow quickly.  As an example, my net worth upon graduating 4 years ago was around -$150,000.  That looks like a big hole but in just 4 years my current net worth is now -$90,000.  By optimizing my income potential and paying off high interest student loan debt, my net worth increased $60,000 in 4 years.  My goal is to break even (a whopping net worth of 0!) in about 5 years.

The power of paying off student loan balances and using that extra money to pay off your next balance is very potent in increasing your net worth.  I will discuss different student loan payment strategies and how to find the right one for you in future posts.